AHI Gauteng Blog

Trade Profile: South Africa Prioritizes Populism at the Cost of Competitiveness

Trade Profile: South Africa Prioritizes Populism at the Cost of Competitiveness

Editor's Note
Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled out over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.

In the fourth instalment, we focus on South Africa.

Economic background
Historically, South Africa has been indifferent to global trade. Because raw commodities, the mainstay of its export activity, are generally not subject to protection by other states, South Africa has had little incentive to aggressively negotiate global trade deals. It typically relied instead on the General Agreement on Tariffs and Trade, and later the World Trade Organization, to govern its international dealings, while focusing most of its attention on regional commerce. Given its long-standing advantages relative to the rest of southern Africa in sectors such as manufacturing and services, South Africa's emphasis on regional trade has helped it dominate its neighbors economically. But its wealth of natural resources and comparatively diverse industries notwithstanding, the country's politics have frequently hindered its competitiveness abroad.
The development of South Africa's vital commodities sector changed the country's economic and political trajectories. Needing large quantities of capital and cheap, abundant labor to mine its natural resources, South Africa opened itself up to the international capitalist order in the late 19th and early 20th centuries. The country's government, meanwhile, instituted discriminatory laws to restrict the wages of non-white South African workers and maximize competitiveness in the crucial extractive sector. The laws soon expanded as South Africa's leaders worked to ensure that the black majority lacked the means to undermine white minority rule. To that end, the government supported the mining industry, controlled by white South African businessmen, and resisted broadening the country's economic base to empower black Africans.

Along with its domestic economic priorities, South Africa pursued regional trade agreements. The country has been a member of the South African Customs Union (SACU) since the bloc's founding in 1910. SACU, the world's oldest customs union, facilitates trade between South Africa, Botswana, Lesotho, Namibia and Swaziland and applies a common external tariff for trade with countries outside it. Emphasizing free trade within the region has helped South Africa achieve its goals. During the apartheid era, the country used its economic and military clout to exercise considerable power in the southern part of Africa, below the Congo Rainforest. South Africa forged ties with neighboring states, as well as those farther afield, such as Zambia, through infrastructure projects to expand its sphere of economic influence and establish itself as a trade hub for southern and central Africa. Beyond the economic benefits that the arrangement afforded it, South Africa pursued regional integration in an effort to dominate the region and prevent security threats from emerging against it.
Despite its unmatched influence in southern Africa, however, South Africa's economic security was far from assured. Cyclical global commodity price slumps, investor confidence scares and Western sanctions on the country for its apartheid policies put South Africa in an increasingly difficult position in the 1970s and 1980s. Without its financial and trade ties with the West, namely the United States and United Kingdom, the country's economy couldn't cope. The fall of the Soviet Union, and with it, the menace of international communism, precipitated the end of apartheid and the start of negotiations to transition to a government ruled by Nelson Mandela's African National Congress (ANC).
Since 1994, South Africa has further integrated into the global political economy. Its trade relationships, moreover, have diversified as developing countries such as China — and, in turn, their appetite for commodities — have grown over the past two decades. At the same time, however, the ANC-led government has put the country on a populist path, in large part to empower the black majority after decades of oppression. Many of the policies that successive ANC administrations have espoused, such as Black Economic Empowerment, a kind of affirmative action, prioritized social justice at the expense of economic efficiency, competitiveness and long-term growth. The shift toward populism has compounded South Africa's myriad structural problems, including a rigid labor force, a persistently high unemployment rate and a high cost of doing business.
Implications for Trade
Offensive interests
South Africa's biggest interest is in maintaining exports of its raw materials. These include natural precious and semi-precious stones, precious metals, mineral fuels, ores, slag and ash, and iron and steel. South Africa's abundant natural resources accounted for over 43 percent of its total exports in 2016. Because tariffs on industrial commodities tend to be small, though, its main priority is simply retaining access to markets in developing countries such as its fellow BRICS states — Brazil, Russia, India and China — and other African nations.
Even so, South Africa is working to lower trade barriers in certain sectors of its economy, namely the automobile manufacturing industry. The country has a long history of building vehicles for both civilian and military purposes, and automobiles still make up a significant portion of its industrial sector today. South Africa ranked 26th among the world's leading automobile producers in 2016, when vehicles accounted for more than 12 percent of the country's total exports. Over the past two decades, it has turned more and more to producing vehicles under the license of foreign brands, enabling it to break into the car market in developed countries, including the United States, Germany and Japan. But deficiencies in South Africa's transport structure and regulatory system, coupled with periodic labor strikes, make it difficult for the country to keep up its overseas exports.
Consequently, South Africa will rely more on its customs union in the future rather than undertaking the kinds of difficult reforms that would make its vehicles more attractive to import markets abroad. Its location, after all, puts South Africa in a good position to ship cars to nearby countries, such as Namibia and Botswana, with high incomes relative to those of their neighbors but without the capacity to manufacture vehicles themselves. The same goes for other value-added goods produced in South Africa, such as computers, machinery and equipment. And as the region's populations and economies grow in the coming decades, rising demand for these products may give South Africa's manufacturing sector a boost.
Defensive interests
After more than a century under capitalism, South Africa boasts the most developed economy on the African continent. Not everyone in the country embraces the free market, however, as the ANC's policies demonstrate. So though many of its sectors are liberalized, South Africa's government has made an unmistakable push to protect select industries for political purposes in recent years. The country's leaders have traditionally turned to non-tariff barriers such as quotas, licenses, anti-dumping measures and corruption to fend off foreign competition. Since 2010, for example, foreign truck drivers, who could previously enter South Africa on visitor visas to transport goods, have been required to procure work permits before operating in the country. The move, intended to give black South Africans priority in the transport sector, has dampened cross-border trade.
The country also has taken a defensive stance on its service sector. South Africa was loath to open up services to the European Union when the Southern African Development Community (SADC) negotiated its economic partnership agreement with the Continental bloc, though other SADC members advocated doing so. South Africa's reluctance owes to the fact that its myriad state-owned companies — many of which were once efficient and profitable — have languished over the years. Despite its monopoly, for example, the country's power utility company, Eskom, has atrophied as a result of poor management and underinvestment. Electricity prices in South Africa have surged over the past decade, jumping more than 170 percent even as rates have fallen in many other developing countries. Other state-owned firms in South Africa's transport, air travel and telecommunications sectors have exhibited similarly disorganized and wasteful behavior, requiring numerous hefty government bailouts to keep them afloat. Nevertheless, the ANC-led government has refused to allow competition in the markets in which some of the state companies operate for fear of the political repercussions.
South Africa's government began sheltering its state-owned companies in earnest around the time job growth began lagging and organized labor groups started gaining traction in the country. The labor unions' political rise has cost South Africa competitiveness by helping create a rigid labor market with high wages compared with other parts of sub-Saharan Africa, although the country struggles with unemployment. And their strength will keep President Jacob Zuma's administration, and probably that of his successor, from liberalizing the labor market even if it means jeopardizing the country's competitiveness abroad.
In addition, the government's focus on Black Economic Empowerment has further deterred South Africa from pursuing trade deals. Negotiating a trade agreement would likely involve removing many of the trade barriers around the compensatory measures, such as the new mining charter, released in June, that increases black ownership requirements for mines from 26 percent to 30 percent. (The new minimum applies regardless of whether black investors have divested shares.) As the ANC works to shore up its polling numbers against growing competition from other parties, the government won't sacrifice the popular Black Economic Empowerment campaign for a trade deal that offers little benefit for its most important exports. Instead, Zuma's administration will probably implement more such policies to appease his party's increasingly populist support base.